Dental Practice Value for a Deceased Dentist's Family

I have a close friend that passed away last week unexpectedly. He had a heart attack at age 54 with no prior symptoms. It really was a bummer. His wife has a prospect to buy the practice. He’s a good guy and it could work out perfectly. The big question is the value of the practice.

I've heard one formula for determining "good will" is to take the annual gross average for the past three years and multiply times 40% for the value of the "good will" of the practice. Equipment, etc. is not included with this value.

Please let me know your thoughts and comments. We need to get this deal "up and running" for the sake of this family ASAP.

There are many formulas and rules of thumb. However, instead of relying on the rule of thumb methods and potentially leaving a lot of value on the table, the spouse should hire someone who can assess the reasonable "range of value" without needing or having to pay for a full blown valuation report. There are many transition professionals that can provide this service, even brokers. If you decide to try a broker, simply let them know that at this time all you need is to have them assess the range of value, assuming you're pretty sure you have a buyer. If for some reason this buyer falls through, at least you've already have a relationship with a broker who may be able to find you another buyer quickly. Good luck.

Tim,

Could you do the valuation from the P&L and balance sheet, without seeing the practice?


Yes, I can determine a "range of value" from good financial information. It’s what I do for our buyer representation clients. I’ve never stepped foot in the office of most of my buyer representative clients, what do I know about the working condition of the equipment? I’m not an equipment vendor or specialist.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Dental Practice Purchase Price Allocation: Is Goodwill the Devil?

Sometimes we come across uninformed buyers that want the majority of their purchase price allocated to equipment because they can get an immediate tax write-off under Internal Revenue Code Section 179 of up to $125k and $250k in very recent years. However, part of our job is to understand and educate ourselves about the state/locality that the transaction will occur in and educate our buyer/client on ALL the tax considerations of price allocation, not just income tax.

Many, many years ago goodwill was the devil in the eyes of every buyer. Why?

There was a time when goodwill was NOT deductible under the tax code, therefore from a buyer’s perspective, any allocation to goodwill was NOT providing them with any income tax savings. However, goodwill was always treated as a capital asset and subject to capital gains to sellers, therefore, sellers wanted most (and in some cases ALL) of the price allocated to goodwill. I remember when this one issue, the allocation between goodwill and tangible assets, was the most stressful part of most transitions. Not anymore though.

Now, buyers can write off goodwill over 15 years, so in my mind, that was a decent compromise from an income tax perspective between buyers/sellers when negotiating the allocation.

Enter the Sec. 179 write-off issue where the IRS increased the write-off election from $25,000 to over $100,000 and in recent years $250,000. All of a sudden, buyers were reverting back to the "old ways" of trying to minimize goodwill while trying to maximize equipment/furniture/computers and other areas that would generate a faster tax deduction, let alone ANY deduction. STILL, sellers wanted their capital gains so this issue of price allocation was once again a hurdle, though a low one that could usually be jumped fairly quickly.

Then the long term capital gains rates were lowered to 15%, down from 20% and at one time 28% so sellers once again began pushing firmly for more goodwill allocation while the buyers wanted more equipment due to the ability to write off $100,000 under Sec. 179 immediately. When the IRS recently increased the Sec. 179 write-off to $250,000, those that were purchasing large practices where the value of equipment could easily reach that level, began pushing for the higher equipment allocation and price allocation once again became a struggle.

These days, states & local governments are finding other ways to tax businesses aside from income tax, which usually means higher sales tax, personal property tax, transactional tax, etc. Therefore, buyers need to be educated on how the allocation of the purchase price can affect them from EVERY tax perspective, not just income tax.

Take Maryland for example. We have a 6% sales tax (was 5% a couple of years ago) on the allocation to equipment/furniture/computers and supplies, so on an allocation of $100,000 to those items you just cost yourself $6,000 DUE AT SETTLEMENT. Then our counties also assess a personal property tax on business assets, and on $100,000 over 10 years, that's easily another $10k-$15k. So the buyer’s allocation to tangible assets/supplies might cost them more than $20,000 in other taxes compared to $100,000 allocated to goodwill where there is no sales or personal property tax in most jurisdictions....YET.

Keep in mind the income tax savings on $100,000 will likely be nearly the same over 15 years whether it's goodwill OR equipment, with the only difference coming from the income tax brackets the deductions are taken in. The income tax benefit with equipment and supplies is the ability to get those tax savings sooner rather than later. However, if you run the numbers out over 15 years (the life of goodwill under the tax code), the allocation to equipment/supplies will almost always cost you more due to the other taxes you incur, at least here in Maryland and other jurisdictions we've seen.

This is just one reason why buyers should consider seeking advice from an advisor that has many years of experience with practice transactions & transitions, this one area can keep a buyer from making a mistake AND save them money.

This first appeared on NewDocs.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Is an LLC or and S-Corp Best for Owning the Dental Building?

I have heard it said that the best way to go about owning a building and practice is to have the building set up as an LLC and the practice as an S-Corp, with the LLC renting out the building to your S-Corp practice. Assuming this model is followed, would the following be legal:

Let’s say you own a building with enough space to house multiple businesses. You start off with your practice set up in one area/wing/whatever of the building and rent out the rest of it. Perhaps you plan to use the extra space in the future for expansion, but that really is not important. Commercial real estate hits a rough patch and your LLC comes dangerously close to failure. Your dental practice is still rather successful. Would it be legal to "renegotiate" and jack up the rental rate on your dental practice so as to help your commercial property LLC get through the tough times?

The basic question here is whether or not it is legal to essentially use the rate charged to your practice to mediate the bumps felt by your commercial property. (I suppose the reverse of this situation is possible as well, with you lowering the rate charged to a struggling practice by your successful commercial real estate... but this situation seems unlikely at best).

Or you could simply use the S-Corp profits and lend them to the LLC to keep it afloat. Assuming you're the sole owner of each both flow through to your ind. tax return so the net tax benefit will be the same.

Remember, the S-Corp needs to act in a prudent business fashion. If it's already paying "fair market" rent and you didn't own the LLC and the landlord asked you to renegotiate the lease to pay more rent, would you still do it? The answer is no.

Don't make it more complicated that it needs to be.

Our friend Jason Wood would like to add:

The only thing I will add to this excellent answer is a real world experience as to why it should be done this way as opposed to renegotiating the rent and putting it in writing. 

A client that contacted us after-the-fact had entered into an "above average rent" with his dental practice for the building that he owned.  Because it was a part of the lease there was a paper trail.  When he lost the building as a result of the economy we are in, the bank "relied" on the above market rental rate outlined in the lease to force the dentist to continue paying the above market rent. 

In other words, don't renegotiate your rent, do what Tim suggests instead.  Lend the LLC money personally so that if you lose the building it isn't attached to your separate entity.

Now that’s great information to know!

Thanks!

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Dental Production vs. Collection Problem

Can you tell me where I can find legal definitions of "production" and "collections" as they relate to dentistry?

 I've just started working for a group practice. I have a contract (as an independent contractor) that states that I will be paid "30 percent of the production resulting from dental services provided by" me according to their standard fee schedule. I was happy with that until I discovered that they are trying to call their collections "production" and compensate me accordingly. (The word collections is not mentioned anywhere in my contract.)

 Some of the things they are claiming according to this nomenclature are that when they run a promotion for a free exam (etc), since they are charging nothing, it doesn't count as "production" and I get paid nothing. If they discount a fee, it discounts what I get paid. They also said that if a patient defaults on their payment, that it retroactively counts against my "production" and is backed out of my pay. (Of course, since I'm not an owner, I have no say what promotions get run, or when.)

 Naturally, I'm contesting all this, since it would basically give them carte blanche to not pay me for whatever they decide not to charge for. In school, production was always defined as "the procedures you perform" and collections as "what the patient/insurance actually pays." Is this incorrect? Can anyone help me find official definitions of these terms? I'm really hoping I don't have to involve an attorney.

 Thanks!


First, different people use the term “production” very loosely. While one might expect it to mean the number based upon the practices fee schedule, many people simply use it to fit their needs. You’ve learned a very valuable lesson, which is (and this is for every associate and owner dentist):


Make sure you define these terms in your agreement. As an associate, if you get a contract that says you'll get 30% of production, insist that a definition be inserted that your dental attorney is comfortable with. The same goes for many other terms thrown around in agreements, compensation, professional expenses, full time and part time, just to name a few. Use examples if you must so it's very clear.


Check with the ADA as to their definitions. They put statistical information out there and they must have "standard" definitions for these terms.


Good luck. You’re right to contest this.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Fair Price for Dental Practice?

I've been working at this practice for 2½ years; since it first opened. My boss built it with plans for someone else to work in it, but that fell through, so I've been the sole dentist there. I am talking to him about buying it but can't decide if it is worth it. He wants all the money out of it that he put in, but based on production numbers, I don't see how this can work out for me.



Here's a little background…


We are the only office in a small town. I have built a good reputation in the town and it would be very nice to take over this practice and keep the patient base and the goodwill that I have earned there. I could probably build my own practice there (based on contractual issues that I won't get into here) but I really don't want to screw over my boss since we are friends. The balance on the practice loan is 489k and he says he put in 50k of his own and that he can't sell it for less than that.


Here are some (very basic) collection figures:


2007: 195k, based on 7 ½ months, mostly part time


2008: 515k


2009: should end up around 600k


I know that I haven't given much information, but that's all I have on hand right now. I just don't know where to go at this point. I'd rather not have to start another new practice from scratch since I've basically done that with this one. Any suggestions for what I should be doing next?


Thanks in advance for any help. I'm at my wits end.

The practice may or may not be worth what he's asking; there's not enough information to make that judgment.

If it's a 3-4 operation practice which should have only taken approximately $300k-$400k to open, I wonder where the other debt came from? Was it from supporting you and the practice for 2 ½ years maybe? If so, he's gotten some pretty nice tax breaks for his increased debt and I agree, that's not your problem and it may be overpriced.

One can't assess a practice like this on revenue alone though; that's very dangerous for both buyer and seller. If this were a 20-year-old practice with older equipment and older technology then I would agree, the price seems out of line. This is a 2 ½-year-old practice, maybe with new technology with revenue of $600k and growing, the price may be reasonable.

On the other hand, if it took over $600k in debt to open this 6 op practice with all the bells and whistles and it has the potential to be a $1 million practice within a year his price may be a bargain.

If this practice is only capable of doing about $600k, you don't want to buy it for that price for sure.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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In-House Pre-Paid Dental Plan May Be Solution to Collection Issues

Our good friend, Dan Marut, recently published the below article on his excellent website, NewDocs and asked they we repost it on our blog. This is a must read.


Assault on Private Dental Practice


by Michael David McGuire

From business assaults by insurance companies... to issues related to patient treatment acceptance... to the increased cost of attracting a steady stream of new patients... the private practice dentist is dealing with a great deal more these days than at any time in past two decades. However, there is an innovative new idea... based on a tested and proven past concept... that can dramatically increase new patient flow and treatment plan acceptance, while increasing net practice income by 30% or more. This new approach is being nationally branded as Quality Dental Plan and is being offered by Operational Management System under their Complete Dental Plan turnkey marketing system (details at CompleteDentalPlan.com). This approach is now recognized by many as being one of the nation’s top solutions for helping increase income and profitability for private practice dentists, as well as giving new patients an additional reason to seek dental care.


“One of the things that we noticed early on as the economy began to sour was that more and more patients were having a difficult time following their suggested treatment plan and some putting off dental visits altogether,” said Samantha Miller, Office Administrator for Today’s Dentistry, a private practice dental office in Ashland, OR. “Part of the problem was the fact that people are worried about money and expense. We eliminated a great deal of this resistance virtually overnight by implementing the program offered by Quality Dental Plan.”

As mentioned above, Quality Dental Plan is the brand name for a patient pre-payment membership plan developed, offered and marketed nationally to dentists by CompleteDentalPlan.com. Although the core concept behind the plan offers plan members a lower price for a menu of dental services created and priced by the local doc, the net result is that the local dental office actually sees an increase in patient revenue since all dental fees must be paid, in advance, at time of treatment to qualify for the discount that the local doc has established. “We tracked the decreasing value of uncollected fees from patients over a six month period,” Miller said, “and we noticed that uncollected fees often remained uncollected. This issue was completely eliminated once we implemented QDP in our office since all QDP member patients paid in advance for all services.”

Pre-pay so-called “membership plans” are not new to dentistry... and have a long history of proven success in private practice. However, what is new... and what QDP does so well... is to take this long-proven concept and wrap it in an easy to implement, turnkey system backed by national caliber marketing materials and a national marketing campaign.

“This is one of the smartest practice management tools that I have ever implemented in our office,” according to Dan Marut, DMD. “With QDP we set our own list of benefits, our own pricing structure and determine the fees that we are going to charge. A complete Implementation Guide was included... so set up was easy. The marketing materials are professionally created and were all customized by CompleteDentalPlan.com for our office.” The QDP branded promotional materials include customizable patient and local business letter templates, a brochure, postcard and radio commercial... all developed by a top New York-based marketing firm. CompleteDentalPlan.com also backs all QDP Member Dentists with strong implementation support, geographic exclusivity and help with local marketing.

“This is a complete turnkey set up,” said Dr. Marut. “We were able to fully implement... and start seeing the benefits of the plan... in less than a month. The Implementation Guide helped me and the front office team get up to speed with very little effort. All management and marketing systems were very easy to implement. The acceptance from patients was amazing.”

Other docs from around the nation have seen the value of implementing quality pre-pay membership plans like QDP. “I have never liked the way the insurance companies dictate to me and my office,” said private practice dentist Dr. Doug Paulus of Massillon, OH. “By having a majority of patients pay in advance for all services... this hassle has been almost completely eliminated. The patient pays less out of his or her pocket... and we increase practice income.” Dr. Carl Stubblefield of Boise, ID agreed. “Quality pre-paid membership plans like QDP can be a huge win-win for both us as doctors and for our patients.” In the specific case of QDP from CompleteDentalPlan.com, the local doc remains 100% in charge and collects 100% of all revenue generated from plan membership fees and fees for services. Dr. Daniel Siriphongs of San Andreas, CA indicated that pre-payment membership plans can greatly reduce administrative and collection costs. “This is a major side benefit,” he said. “Anything that introduces more new patients into the practice is a major plus.”

“It is awkward and uncomfortable for me, personally, to have the front office team have to try and collect on past due patient payment plans and unpaid bills,” said Dr. Wendy Crisafulli of Bothell, WA. “Any system that makes it easier for the patient to pursue treatment and eliminates those stressful collection calls for us is a major net positive. Without a doubt... this simple step increases our practice income.”

“On the face of it the so-called “self determined discounts” created by us and offered within the plan might look as if it would decrease practice revenue,” said Miller of Ashland, OR, “but the reality is that the discount for the patient is more than offset by the savings we realize from greatly increased treatment plan acceptance, increased collections and decreased administrative costs.. The QDP marketing systems also helps us very cost-effectively reach out to the community to attract new patients.” Another interesting innovation that CompleteDentalPlan.com is offering their QDP Member Dentists is a turnkey marketing system to reach business owners in their local community with a very affordable “dental plan” for their own employees. “The marketing approach that QDP offered was, I think, really brilliant in that they showed us how to reach out to the local community and help business owners find a great way to offer a really cost-effective dental benefit to their employees,” said Dr. Dan Marut, sighting a local retail store and a soft-serve yogurt shop as examples. “With one letter we brought in 20 new patients in one day with just one follow-up phone call. The business owner becomes a hero and her employees will have top rate dental care for less than they would have to pay for dental insurance.” In almost all cases, the cost of a QDP Business Membership for employees is fully tax deductible by the local business owner. “This has proven to be not only a great practice income building tool,” said Dr. Marut, “but also a really great public relations and marketing tool as well, that allows doctors to contribute to the overall wellbeing of their communities. I highly recommend it.”

For more information about how to become a QDP Member Dentist... and to lock in geographic exclusivity for your area... go to CompleteDentalPlan.com or call (323) 960-5029.

This first appeared on NewDocs.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

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